Why I think Newcrest Mining Limited shares are too expensive today

Can Newcrest Mining Limited (ASX:NCM) continue its strong run?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Gold and copper mining magnate, Newcrest Mining Limited (ASX: NCM) today released its half-year results for the 6 months to 31 December 2016. It posted a strong performance with much higher profits, although the company has some work to do to justify today's hefty price tag. Here's what you need to know (all figures in US$)

  • Revenues rose 17% to $1,807 million
  • Net Profit After Tax rose 131% to $187 million
  • Dividends of 7.5 cents per share
  • All-In Sustaining Cost (AISC) of $770/tonne, flat on last year
  • Average realised price of $1,277 per ounce of gold and $2.30 per pound of copper, up 15% and 0% from last year respectively
  • Debt steady at 1.3x Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA), gearing of 20.8%

So What?

Newcrest's results are a prime example of what can happen when production costs hold steady, yet the average realised price for a product rises. The price of gold rose substantially during the past half-year to result in a huge uplift in Newcrest's profits. Gold production rose 2%, primarily due to improved milling rates, and could rise further due to investments in this area made in the half.

Newcrest's gearing remains moderate, and its resource reserves remain strong with an estimated 65 million ounces of gold, 11 million tonnes of copper, and 38 million ounces of silver. It was good to see production costs remain steady, as changes here are one of the big things that have brought gold miners undone in the past.

Now What?

With a conservative approach to dividends and its balance sheet, alongside the available liquidity to support capital investment or acquisitions, Newcrest once again looks like an attractive through-the-cycle gold miner.

The big thing I am concerned about is the company's share price.

Assuming a full-year profit of approximately A$500 million (slightly more than double the half-year result, assuming constant exchange rates), Newcrest is valued at about 35 times its full-year earnings. That is mighty rich for a company with no control over the end price of its products.

There are three ways to make money in Newcrest at the moment – for production to go up and prices to fall, for the price of gold to rise, or for the Australian dollar to weaken against the U.S. dollar. The latter two are tenuous and rely on factors that are entirely outside of Newcrest's control.

Without a good view of either the Australian dollar or the price of gold, buyers are potentially taking on a lot of risk in Newcrest. For my money, the company is too expensive at today's prices and I would not recommend it to readers.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »